The FSA explained activities that require the activity licence of a credit institution

Today, the Financial Supervision Authority published a memo aimed at the companies operating on the Estonian financial market, where it pointed out that only credit institutions have the right to receive deposits and other repayable funds from the public.

Kilvar Kessler, Chairman of the Board at the Financial Supervision Authority:

“The memo was necessary because the Creditors and Credit Intermediaries Act that entered into force at the start of the year is giving rise to the misconception that this legislation permits the receipt of funds from the public and the use of such resources for financing other activities.

“The Financial Supervision Authority draws a clear line between banking activities and the activities of other creditors. Our memo helps to decide whether and what kind of activity licence must be applied for in order to perform the planned activities of a creditor lawfully.”

The memo of the Financial Supervision Authority primarily concerns creditors and credit institutions, and the persons who request the relevant activity licence.

Based on the provisions of law, the Financial Supervision Authority draws a line between banking activities and the activities of other creditors. It is necessary now that the Creditors and Credit Institutions Act has entered into force.

The Financial Supervision Authority helps entrepreneurs to decide whether and which activity licence must be applied for in order to perform the planned activities lawfully. The activity licence of a credit institution and the activity licence required for operating as another creditor give the right to practice different activities, the issue of these two different types of activity licence is decided by different agencies and these different activities and persons have to comply with different requirements.

The Financial Supervision Authority issued the memo in order to manage the risk where a person who requests the activity licence of a credit institution operates or starts to operate as a bank whose activities require the activity licence of a credit institution. Clarity creates equal competitive conditions for market participants engaging in identical activities and gives the persons who have handed over repayable funds a better understanding of their rights.

The Financial Supervision Authority already highlighted publically on 23 September 2014 that only credit institutions have the right to receive deposits or other repayable funds from the public, and to use such funds to issue loans and finance the activities of others in any other manner.

2. Which financial services providers does the memo concern?

The memo of the Financial Supervision Authority primarily concerns creditors and credit institutions, and the persons who request the relevant activity licence. Indirectly, the memo concerns the persons who have handed over repayable funds to creditors and credit institutions.

3. What is the impact of the memo on the options of, for example, instant loan companies, to finance their activities?

Lenders must evaluate and, if necessary, organise the financing of their activities in such a manner that it cannot be construed as accepting money from the public for depositing or as the receipt of other repayable funds in any other manner. This can have an impact on the sources, accessibility and price of the resources required for financing activities.

For example, sending bulk mail to people on the basis of databases or calling them to invite them to buy the creditor’s bonds, and the issue and sale of the latter can be regarded as receipt of repayable funds from the public in the opinion of the Financial Supervision Authority. Constant issue of bonds for the purpose of making them tradable at the stock exchange with our without subsequent trading can also be regarded as receipt from the public.

Receipt of repayable funds from credit institutions, insurers and certain other professional investors cannot be qualified as receipt from the public. It is worth mentioning that the public offering provisions of the Securities Market Act must also be complied with in addition to the legislation that defines the activities of credit institutions and other legal acts when selling securities is used to finance one’s activities. However, the Securities Market Act does not furnish the activities that require the activity licence of a credit institution, and the provisions of securities law cannot be applied without reservations when furnishing ‘public’ defined pursuant to the Credit Institutions Act and other banking law.

4. What is the impact of the memo on the activities of savings and loan associations? Can they receive funds from the public?

Savings and loan associations can receive deposits and other repayable funds from their members. The activities of savings and loan associations are regulated by the Savings and Loan Associations Act. The memo does not concern them directly.

5. What is the impact of the specification of regulations in the memo on the innovation of financial services and products on the whole?

The Financial Supervision Authority welcomes enterprise and innovation, as well as the initiative of entrepreneurs to assess the lawfulness of their activities. The Financial Supervision Authority operates on the basis and pursuant to the procedure stipulated by law and applies the existing laws. If necessary, it helps to achieve legal clarity.